Question

Moore Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated (to zero net book value) by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, additional net operating working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number.

WACC	10.0%
Net investment in fixed assets (depreciable basis)	$70,000
Required net operating working capital	$10,000
Straight-line depreciation rate	33.333%
Annual sales revenues	$57,000
Annual operating costs (excl. depreciation)	$30,000
Expected pre-tax salvage value	$5,000
Tax rate	35.0%

Answer 1

Calculation of Project's NPV
Particulars	0	1	2	3
Initial Investment
Investment in Fixed Assets	-70000
Investment in net working capital	-10000
Net Investment (A)	-80000
Operating Cash Flows
Annual Sales (B)		57000	57000	57000
Annual Operating Costs (C )		30000	30000	30000
Depreciaiton (D = $70,000 *33.333%)		23333.1	23333.1	23333.1
Profit Before Tax (E = B-C-D)		3666.9	3666.9	3666.9
Tax @35% (F = E*35%)		1283.415	1283.415	1283.415
Profit After Tax (G = E-F)		2383.485	2383.485	2383.485
Add back Depreciation (H = D)		23333.1	23333.1	23333.1
Net Operating Cash Flows (I = G+H)		25716.585	25716.585	25716.585
Terminal Value
Pre tax salvage value (J)				5000
Tax @35% (K = J*35%)				1750
After tax salvage Value (L = J-K)				3250
Recovery of net working capital (M)				10000
Net Terminal Value (N = L+M)				13250
Total Cash Flows (O = A+I+N)	-80000	25716.585	25716.585	38966.585
Discount Factor @10% (P) 1/(1+10%)^n n=0,1,2,3	1	0.909090909	0.826446281	0.751314801
Discounted cash Flows (Q = O*P)	-80000	23378.71364	21253.37603	29276.17205
NPV of the Project	-6091.738279
Therefore, project's NPV is -$6,092